How to deal with tax and social Security when paying overseas employees from the UK

If you’re setting up an international business or expanding into markets overseas, you’re likely to have employees working around the world. And they’ll need to be paid.

You may be familiar with tax and social security rules in the UK. But, rules are different when you’re paying people overseas, making the whole process more complicated. And they impact both your costs of employment and your employees’ take-home pay.

In this guide, you’ll find 4 examples that’ll help you determine what tax and social security payments you need to make for different types of employees. Ensuring you’re compliant can help you avoid any tax-related issues.

Because the rules are different, we’ll look at tax and social security separately.

Dealing with taxes in different employee scenarios

Scenario A: A UK-based employee, Amanda

The first situation is one you’re probably familiar with — your employee Amanda is a UK resident employed to work in the UK, and will continue to work here.

In these circumstances, you’ll simply need to deduct Pay-as-you-earn (PAYE) and pay Employers National Insurance Contributions (NICs) on her earnings.

Scenario B: A non-resident employee, Ben

You recruited Ben, who lives abroad, to your company. He isn’t a UK resident and will work for you remotely.

Normally, you won’t have to deduct PAYE unless he comes to the UK as part of his regular job. Even then, PAYE wouldn’t be due as long as his visits are infrequent, and only for things like general meetings or training. He’ll be paid on a gross basis from your UK payroll. However, if at any point Ben performs a substantial part of his duties in the UK, he’ll be subject to PAYE.

You’ll also need to check if Ben has ever been a UK resident or intends to work here in the future. If that’s the case, then you should apply to HMRC for permission to pay him on a gross basis.

Most likely you won’t need to withhold his local equivalent of PAYE — he’ll be responsible for his own local tax liabilities. But, there are two caveats.

1. You’ll have to withhold tax if you have a corporate entity in Ben’s local country, or if you’re deemed to have a corporate presence there. In that case, you’ll probably need to set up a local payroll and withhold taxes through it. Having a corporate presence is a local matter, though, so you’ll need to check legislation and treaties.
2. Although most territories don’t require tax withholding, if there’s no local corporate presence you should still look into any specific rules for each case.

A question many ask is if it’s a possibility Ben could face both sets of deductions.

Unfortunately, yes – it’s very possible. If you’re deemed to have a corporate presence overseas, and if Ben travels to the UK to perform a large portion of his job, it would likely lead to double withholding. This will cause your employee some cashflow headaches, so it’s best to avoid this situation if at all possible.

Scenario C: A short-term transfer, Carole

Next, there’s Carole. She’s a UK resident who’s worked in the UK for some time. However, you want to send her to another country for a short period – less than two years.

Both of you want her to stay on the UK payroll — you may not even have a way to pay her overseas. In addition, she may have ongoing financial commitments in the UK like a mortgage or loans. Not to mention, staying on the UK payroll would also continue Carole’s pension arrangements.

Assuming she stays on your UK payroll, the next question is if she will remain resident in the UK for tax purposes. The HMRC has a UK statutory residence test for this, and it’s fairly detailed. If the answer is yes – and assuming that you’re paying her from the UK – you’ll have to calculate and deduct PAYE.

If Carole becomes non-resident, you can apply to HMRC for an NT code, which would allow you to pay her gross without deducting PAYE.

And if Carole faces double withholding tax (PAYE and the local equivalent), then you can apply for relief from HMRC.

Scenario D: A long-term transfer, David

David is in exactly the same position as Carole, except that the transfer will be long-term – three years or more.

All the same considerations apply, except that it makes sense to move David’s employment contract and payroll to a local corporate entity if you have one. As long as David doesn’t come back to the UK regularly, there’s unlikely to be any double withholding.

Should you set up an overseas corporate entity?

You may want to think about the implications around withholding tax before setting up an overseas corporate entity. Also, be aware your employees’ activities may lead to authorities deeming that a corporate presence has been created. Before that point, however, you can pay employees in Ben’s position from the UK payroll on a gross basis, leaving him to deal with tax locally. Once there’s a corporate presence in place, you’ll probably need to withhold tax. It’s easiest to do this by setting up a non-UK payroll.

In the examples above there are different implications for Ben and David. So you’ll want to review any specific situation you encounter.

Dealing with social security

You might expect the situation for social security payments (employers’ NIC) to be similar to PAYE. Unfortunately, this isn’t the case. There are separate rules in most countries, often moderated by agreements between countries.

For Amanda (your UK-resident employee) and Ben (your non-resident employee based abroad) things are relatively simple. You – as an employer – and Amanda will pay NI contributions in the UK. Social security payments for Ben will be determined by his own country.

The situation is more complicated for Carole and David, who are transferring overseas.

Social security in the European Economic Area (EEA)

Suppose Carole and David are transferred to a country in the European Economic Area (EEA), which includes EU countries and some others.

Carole’s UK NICs will continue to apply, and she will be exempt from the other country’s social security payments. This is because her transfer is for less than two years. You both need to apply to the HMRC for a portable document A1 or E101 to show this.

David, with a three-year transfer, will be subject to that single country’s social security system.

Social security with other countries who have an arrangement with the UK

If Carole and David are transferred to a country with an arrangement with the UK. they’d usually pay local social security contributions. However, there may be a way to continue paying contributions in the UK instead. A Certificate of Continuing Liability and permission for each employee is needed. This is more likely to work for someone going abroad for a short time.

These countries are: Barbados, Bermuda, Bosnia-Herzegovina, Canada, Chile, Croatia, Guernsey, Israel, Jamaica, Japan, Jersey, the former Yugoslav Republic of Macedonia, Mauritius, Montenegro, New Zealand, Philippines, Republic of Korea, Serbia, Turkey, and the US.

Social security with other countries who do not have an arrangement with the UK

You must calculate and deduct NICs for the first 52 weeks that Carole and David work abroad.

Specific considerations for employees moving abroad

Employees who spend most of their time each year working abroad may be able to get full UK tax relief on their earnings. Since David is going to be working abroad for at least a full tax year - 6th April to 5th April - he should inform the HMRC in advance. This might apply to Carole too, depending on her specific start and finish dates.

The way to do this is by using a P85 form. The HMRC will then confirm what tax code to use. Employees also need to complete their UK tax returns as usual.

If Carole or David are subject to overseas social security contributions, they may also want to make voluntary UK NI contributions to keep entitlements to the state pension.

They also need to keep an eye on their residence status, particularly if they visit the UK, conduct business here, or buy a new property. And they should keep HMRC informed of any changes in status, such as if they marry or move.

Keeping overseas payroll costs low

If you’re considering sending employees abroad, or you’ve already got a corporate presence in another country, you could save yourself a lot of money by getting a Wise Borderless Account. You can hold and manage money in 27 currencies, get yourself pound, euro and US dollar local bank details, and make sure you always get the best possible fee and exchange rate on international transfers.

And, if you have a lot of employees overseas, Wise offers batch payments so you can pay multiple employees in one go.

Still need more help?

All these rules can make a significant impact on both your business’ costs of employment and your employees’ take-home pay. It makes sense to review the implications before finalising your employees’ contracts, places of work, transfers and overall job specifications.

For more help, visit one of these HMRC websites:

• HMRC Employer Helpline
• HMRC Guidance on paying employees working abroad
• HMRC Tax if you leave the UK to live abroad

Different countries have different regimes, which are constantly updated. This article isn’t a substitute for specific professional advice. However, it will help you understand the main issues involved as you plan. Best of luck.